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Should I play it safe now that I'm retired?

I just retired and I'm wondering the best path to use now with my investments. Should I stick to safer investments (CDs, etc) so that I preserve what I have now or continue on with what I was doing before I retired (medium risk investments)?

Hi Lionel,
There are several risks, during your golden years that you may not be aware of. Those risk are longevity and inflation risk. We are living longer and retirement could last more than thirty years. Combine that with the fact that every year, due to inflation, we lose about 3% of our purchasing power. Over a thirty year period you will need to almost triple your retirement income! Stocks are one of the only investments that tend to outpace inflation but as we know they are very volatile. Bonds are safer but at best, they keep even with inflation and CD's are super safe but almost always lag inflation.

A good advisor can help you weigh all these options and make a retirement plan which is best for you. Oops one more risk I forgot to discuss is withdrawing too much from your retirement accounts, especially in the early years.

Lionel,
While all the answers here are good ones, I agree mostly with Jeffrey. Longevity and inflation risk are the reasons that I suggest to clients that, even after you are retire, we will want to keep a percentage of your assets in growth investments, so that we can try to maintain purchasing power. There are also studies, which are mentioned above, that suggest a portfolio with some stocks is actually less volatile than a 100% bond portfolio. Best of luck, and Congratulations on your retirement.

Dear Lionel,
My answer is very general since there are a number of variables I can't know about you (which typically would affect this answer). If you're in your 60s, just retired and live into your 90s, you may have another 1/3 of your life to finance with investments. You may consider gradually shifting from your "medium risk" (however you define that) some more of a capital preservation mode - but only gradually. Studies show the benefits of non-correlating assets and the benefits of having at least 20-25% stocks in even the most conservative of portfolios. Having this mix actually not only increases your return but provides a lower risk than having e.g. 100% bonds/cash. No doubt my colleagues will provide additional insightful comments.

Lionel, as others have stated we really need to know more about your specific situation to give you a better answer, but generally speaking most retirees are going to be well served with a balanced portfolio. Chances are that you will live a long life and will need growth from your portfolio as well as stability. If you need to withdraw money from your portfolio we would typically recommend that a retiree have about 10 years worth of their investments in so-called safer haven investments like cash, CDs and good quality bonds. The reminder can then be invested more aggressively in stocks, etc. From my experience, a big mistake retirees make is being either too conservative or too aggressive. Both carry their own set of risks.

Lionel, congratulations on your retirement. Your question is difficult to answer with specifics without knowing much more about your current position financially. Your question is a very common question that many retirees pose to their advisors. If you have a financial advisor, a good starting point would be a financial plan that maps out your financial picture. Before I would recommend an asset allocation, I would want to know as much as possible about your financial position. My recommendation would be to find an advisor in your area that might follow this initial thought.

Lionel, The following is a basic approach that may work for you. Remember one of the best means of reducing risk is investing in a broad range of asset classes in diversified portfolios.

You should have 3-5 years of cash flow needs in CD's, money market funds and short-term bonds, which will provide protection in the event of interest rates rises, with some extra pad for extraordinary expenses. This portion of the portfolio should provide 3-5% returns over the long-term (emphasis on long-term). This cash flow on which you live could come from social security, pension benefits, taxable assets, and your 401(k) plan.

You could invest the remainder of your portfolio in a very diversifed stock/bond portfolio. The portion of the portfolio should be diversified across all areas of the stock and bond markets. A good approach is investing in Index ETFs, index mutual funds, and/or low-cost, diversified, actively managed mutual funds.

Another way to increases cash flow is to be sure that capital gains and other income is paid to you in cash, not reinvested in the mutual funds. You can either use the cash to meet you expenses or reinvest the cash in the areas of the market where you see bargains.

The short-term portion of your portfolio should provide a less risky base or foundation. If you have 3-5 years of cash flow available, you should have time to ride out market ups and downs in your stock/bond portfolio, while increasing your long-term returns.

Lionel,
The answer to your question is, as others have stated, it depends. It depends on the size of your nest-egg, your expenses, what other sources of income you have, and your risk tolerance, how long your nest-egg needs to last, inflation and what assets you want to leave to your heirs if any.
A quick way to start would be to take all your sources of income like Social Security, Pensions, etc. and then subtract your life style expenses. The answer will tell you how much of nest-egg you will need to use to fund your life style. If your other sources of income cover your lifestyle expenses then you probably don’t need to take much risk with your nest-egg. On the other hand if you need to use your retirement assets to fund yourself you probably will need to invest in something besides CD’s.
Once you start calculating the required rate of return to fund your lifestyle the math gets more difficult because you should take into consideration the income taxes you will pay on withdrawals from your tax deferred accounts, capital gains taxes on taxable accounts, the corrosive impact of inflation, etc.
I would suggest that you sit down with a qualified financial advisor and create a personal plan based on your current situation. Then the advisor can make the proper recommendations on the appropriate asset allocation, use of other assets, etc., to fund your life style.

Hi lionel,
The answers you have revived so far are all correct. However, if you need to know what will work for your particular situation, get a complete Financial Plan done for yourself and then update it at least every two years.
A completed comphtrhensive plan will give you the best probability of success.
Good luck
Dan

Hi Lionel, I agree with the previous answers as well but Danny's answer includes a financial plan. I don't know how complicated your life is but I do know there is more that goes into retirement planning than just investments. You need to make sure you have your debt paid down, adequate emergency reserves and adequate annual income for 3 to 5 years invested in something fairly low risk like George said. Once you have that done it is my opinion that you could afford to take a little more risk with what is left. Depending on your risk tolerance I would suggest at least 60% of what is left going into equity ETF's or index funds. You don't want to out live your money as the previous advisors have mentioned.

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